Good afternoon, ladies and gentlemen, and welcome to the HireQuest, Inc., Fourth Quarter and Year-End 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jen Belodeau. The floor is yours.

Thank you, Operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest's CEO, Rick Hermanns, and CFO David S. Burnett. I would like to take a moment to read the Safe Harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements in terms such as anticipate expect, intend, may, will, should, or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. Those statements include statements regarding the intent, belief, or current Expectations of HireQuest and members of its Management, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in HireQuest's periodic reports filed with the SEC, and that actual results may differ materially from those contemplated by such forward-looking statements. Except as required by federal securities laws, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect change conditions. I would now like to turn the call over to the CEO of HireQuest, Rick Hermanns. Go ahead, Rick.

First, I'd like to thank everyone for joining us for today's call, especially our shareholders. We appreciate your continued support and your continued belief in the HireQuest model. To begin, I will provide financial and strategic highlights for the full year, and then David will share details on our fourth-quarter results. In Q4, we continued the momentum that we saw in Q3 and exceeded Q4 2019 pre-pandemic comparable revenues, while simultaneously generating strong margins and profitability across the board. Franchise royalties grew 88% in total revenue, 99% in Q4, with net income increasing 62% to $2.2 million, or $0.16 per diluted share. For the full year, franchise royalties grew 67%, and total revenue grew 64% with net income increasing by 121%, reaching $11.8 million, or $0.87 per diluted share. Adjusted EBITDA for the full year was up 54% to $14.7 million. Our fourth-quarter results included annual compensation, which we have historically recognized in Q1. This change in accounting methodology results in two years’ worth of incentive compensation running through our P&L in 2021. This strong growth was both organic and acquisition-driven. Organic franchise royalties growth in Q4 and the full year was 47% and 30%, respectively. During the year we opened 14 new offices, a net increase of 13 new offices up from five new offices in 2020 with a net decrease of eight offices in 2020. Our franchises are incentivized to open new offices, given the attractive economics that our model provides them, and the fact we support them with working capital financing, technology, and back-office support, among other things. Moreover, we support organic growth by helping our existing franchisees with part of the costs to open in new markets. We are unaware of any other franchiser that does such a thing. In addition to new offices, our organic growth was positively impacted by improved sales at the existing offices as they benefited from the pandemic subsiding. We also completed four acquisitions during the year, expanding our market verticals and enhancing our proprietary technology platform. A defining characteristic of 2021 was the strategic transformation of our end markets from almost entirely on-demand light industrial to a healthy mix of light industrial and commercial staffing opportunities. The LINK and Snelling acquisitions early in the year provided immediate scale to our commercial vertical. Our success in quickly integrating both acquisitions is due in large part to our differentiated franchised model, as well as a testament to our operations team and systems. The franchise model is also an important factor in the continued performance of these two businesses. By maintaining local ownership through new and existing franchisees, customer relationships remain intact post-acquisition, enabling our franchisees to better retain pre-transaction revenues. For HireQuest, the success of an acquisition isn't predicated on achieving certain levels of cost synergies through consolidating operations and reducing the expenses of the target, as is often the case with a company-owned model. As a franchiser, we can service new franchisees with minimal increases to our expense structure, providing predictable and repeatable operating leverage as we continue to layer on new organic and acquired business. In Q4, we acquired Dental Power Staffing, which gives us access to the dental market. This acquisition is unique in that it will remain a company-owned store in the near term. But we are utilizing the experience operating this business unit to build out a franchise offering for the dental market. Finally, in Q4, we closed Recruit Media, a next-gen SaaS recruitment platform that streamlines workforce communications. This acquisition allows our franchisees to better serve their customers, and the technology we acquired basically leapfrogged a lot of steps that we had planned in our internal technology roadmap. This momentum has kept up as we have entered into 2022, we have made three strategic acquisitions so far this year, which combined generated over $35 million in sales in 2021. Similar to the acquisitions during 2021, we continue to enhance our geographic footprint and grow in tangential staffing verticals. DM Dickason adds three new Snelling offices in West Texas and New Mexico. DM Dickason historically provided a reasonably significant amount of medical staffing from which we intend to build. The Dubin Group and Dubin Workforce Solutions bring us to Philadelphia and provide executive placement, professional staffing services, and commercial staffing services, respectively. And Northbound Executive Search adds an office in New York City and provides executive placement and short-term consultant services for blue-chip clients in the financial services industry. With the exception of the Dubin Group, each of these acquisitions have already been converted to franchisees. The transaction costs related to these acquisitions, and the costs related to their subsequent conversion to franchises will be reflected in Q1. So as you can see, we've been quite busy on the acquisition front. As I mentioned earlier, a key and differentiated aspect of our asset-light franchise model is that we are able to integrate acquired businesses quickly and with comparatively less operational effort. Because of this, we are able to remain active and opportunistic on the M&A side of things. So there are a lot of great things going on in the business. Our model is truly unique in the sector, and the fourth quarter highlighted the progress we are making scaling this business and driving increased profitability for our shareholders. With that, I'll pass you along to our new CFO, David S. Burnett, for a deeper dive into the results. David joined us in December and brings over 30 years of diverse financial experience to HireQuest. Most recently with IV Asset Group and before that with BKF Capital Group, David has quickly become an important member of our senior management as we grow the business and it is great to have him aboard.

Thank you, Rick. And good afternoon, everybody, thank you for joining us today. We had another solid quarter. Total revenue for the fourth quarter of 2021 was $6.8 million compared to $3.4 million for the same quarter last year, an increase of 98.8%. Our total revenue is comprised of three components: franchise royalties, which is our primary source of revenue, and typically accounts for over 90% of our total revenue; service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable; and fees for various optional services; and third is staffing revenue from own locations. Franchise royalties and service revenue are derived from our franchise base. From time to time, we may have owned location revenue as a result of acquired businesses that are not converted to franchises or held for sale. In 2021, the only owned location is the dental staffing location that we acquired late in the year. Franchise royalties for the quarter were $6.1 million compared to $3.2 million last year, an increase of 87.9%. While the addition of the acquired Snelling and LINK locations contributed to this growth, we experienced organic growth of 47.1% during the fourth quarter. System-wide sales for the quarter were $106.8 million compared to $54.8 million for the same period in 2020, an increase of 95%. System-wide sales include sales at all offices, whether owned and operated by us or our franchisees. During the quarter, our system-wide revenue surpassed pre-pandemic levels, even when the effects of the Snelling and Link acquisitions are removed. Selling, general and administrative expenses for the quarter were $4.4 million compared to $2.2 million last year. The increase in SG&A was primarily driven by increased incentive compensation expense. We have historically recognized discretionary bonuses in Q1 of the following year. However, as Rick noted, we changed our methodology resulting in an acceleration of the expense in Q4. Core operating expenses remained relatively flat, reflecting the leverage in our business model with incremental revenue. The bottom line is we have not added considerable corporate overhead to support our rapid growth. Net income for the quarter was $2.2 million or $0.16 per diluted share, compared to net income of $1.4 million or $0.10 per diluted share in the fourth quarter last year. Adjusted EBITDA in the fourth quarter of 2021 was $3.5 million compared to $1.9 million in the fourth quarter of last year. We believe adjusted EBITDA is a relevant metric for us due to the size of non-cash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to net income is provided in our 10-K. Moving on now to the balance sheet and cash flow, our current assets at December 31, 2021 were $42 million compared to $39 million at December 31, 2020. Current assets as of December 31 included $1.3 million of cash and $38.2 million of accounts receivable, while current assets at December 31, 2020 included $13.7 million of cash and $21.3 million of accounts receivable. The lower cash position was primarily due to acquisitions made during the year. We often provide financing to our franchisees for expansion or initial capital leads. Our notes receivable balance, net of reserves as of December 31, 2021 was $4.2 million compared to $8.1 million at December 31, 2020. During the year, we sold $5.3 million of notes receivable without recourse. We currently have approximately $17 million in availability under our credit facility, even after the three acquisitions completed in the first quarter of 2022. We believe that this facility, which we finalized in the second quarter, provides us with the flexibility and room for both organic growth and the capacity to capitalize on potential future acquisitions. Beginning in the third quarter of 2020, our Board approved and the company paid its first quarterly dividend of $0.05 per common share. Since then, we have paid a regular quarterly dividend, and in June of 2021, our Board approved an increase from $0.05 to $0.06 per common share. We paid a $0.06 per common share dividend on March 15 today to shareholders of record as of March 1, and we expect to continue to pay a dividend for each subsequent quarter in 2022 subject to the Board's discretion.

Thanks, David. HireQuest had a remarkable and transformational year, and I'm proud of our team and our many accomplishments as we execute our strategy and reinforce our conviction in HireQuest's ability to provide a truly differentiated staffing solution to our customers and to create value for our employees, franchisees, and shareholders alike. Our journey is just beginning. I appreciate your support and welcome you to come along as there's never been a better time to be a part of HireQuest. Thank you for joining us this afternoon. We appreciate your interest in our company. Now, I'll open the line to questions. Thank you.

Thank you. Ladies and gentlemen, the floor is open for questions. And lastly, while posing your question, please pick up your handset if posing on speakerphone to provide optimum sound quality. Please hold while I poll for questions. The first question is coming from Mike Baker, from DA Davidson. Your line's live.

Hi, thanks, guys. Appreciate the commentary in the great quarter. I just wanted to ask, now that we're back above pre-pandemic levels, how should we think about 2022, maybe a preview on how you see this year playing out in terms of some of your franchisees opening new offices, or growth in existing offices, what kind of growth we might get from the new acquisitions, and then also talk about if we should expect any kind of increases on your expense line.

Thank you for the question, Mike. I have a few points to share. Firstly, for this year's growth in revenues, I anticipate a substantial increase. This expectation stems from comparing our 2021 revenues, which were still affected by the pandemic, especially in the first three quarters, to a full year that should be free from significant pandemic impacts. I should note, however, that if a new variant emerges, that could affect this outlook. As you may have noticed, our revenues were generally running 15% to 20% below pre-pandemic levels for the first half of the year. We managed to catch up in the third quarter and exceeded those levels in the fourth. Therefore, I believe there is no reason for us to fall below pre-pandemic levels, which bodes well for our overall revenues in 2022. Regarding openings, the economy presents many opportunities as the pandemic subsides. Our franchisees were understandably cautious about opening new offices in 2020 and even in 2021, as recovery was still underway. However, I expect we will see more openings this year as we move further past the pandemic. A few offices have already opened or are planned to open, which is encouraging.

Got it. Okay. And then, more of a short-term question, but just wanted to ask you about, you have a great pulse on the economy, just seeing the labor market in a number of different verticals, modest stuff going on here in the calendar first quarter between cycling stimulus, and the situation in Eastern Europe, and rising gas prices, etc. What's your general view on the economy right now? Obviously, the labor market's very tight. How does that impact you guys? Just your pulse on the economy would be helpful. Thanks.

One interesting observation I made while preparing for this call was the penetration of temporary staffing in Western Europe, which is usually around 10% of total employment. In contrast, in the United States, it's only about 2% to 2.5%. This indicates that companies are increasingly focused on managing their labor costs due to labor shortages and rising wages. Even before the pandemic, in 2019, wages were already increasing significantly in real terms. As these wages rise, companies need to find ways to maintain their margins by controlling costs. I believe, supported by our data, that the demand for temporary staffing will continue to grow. The ongoing shortage of workers will further drive this demand for temporary staffing. Beyond the impacts of the situation in Ukraine and post-pandemic supply chain issues, we're also witnessing a significant demographic shift in the country. As the labor force starts to decline, competition for workers will intensify, necessitating smarter workforce management. I am confident that our company and our franchisees are well-positioned to take advantage of these demographic changes.

Makes perfect sense. Thanks, I will turn it over to somebody else.

The next question is coming from Kevin Spanky, from Barrington. Kevin, your line is live.

Hey, good afternoon.

Hey, Kevin.

Hi Kevin.

I just wanted to start out by just getting that small housekeeping numbers item out of the way here. Just are you able to quantify the impact of that shift in the incentive compensation that you talked about into the fourth quarter from the first quarter?

Moving the incentive compensation from Q1 2022 to Q4 cost us some pretax dollars, approximately $2.006 million, resulting in a net effect of $1.740 million. This had a significant impact.

Okay. No, that's very helpful. And excluding it, it really shows the operating leverage you're able to drive there, but okay. I wanted to ask too about the three acquisitions that you did in January, and those came together in pretty rapid succession. So maybe just any more color on how those came together, how long you were working on those, and any more general comments on the M&A pipeline overall.

Sure. I think we started working on the acquisitions, each one being a bit different. The Dickason acquisition took longer because there were other interested parties involved, which made the process slower, not necessarily due to us or them, but because of the seller's preferences. Generally, once both parties are committed to the transaction, it typically takes us two to three months from letter of intent to closing. We began these discussions around November and December, and were able to close them quickly. This efficiency is thanks to our franchise model, where the team on the ground remains consistent from day one after closing, which simplifies operations. Regarding our pipeline, we are actively searching for opportunities. However, while we could potentially have a large pipeline, we are selective about the acquisitions we pursue. We are not expanding just for the sake of increasing our sales figures; instead, we focus on acquisitions that are beneficial for our shareholders. This approach means we filter potential deals more carefully, but there are still many opportunities available. The pandemic had slowed down the market in 2020, as many businesses were reluctant to sell due to declining performance. However, now that many companies are exceeding their pre-pandemic sales, I expect to see an increase in available deals, particularly from those who have delayed their retirement plans and are now ready to sell.

That's helpful commentary. And I wanted to ask too about Driver Quest, which you launched the summer of 2021 and just adoption of that offering among your franchise base and just commentary on how that's progressing and helping to drive growth.

It's a fair question. It hasn't been a significant driver of growth at all. For 20 years, we received requests for drivers, but we refrained from pursuing that due to the considerable insurance risks associated with trucking. We developed a special program to enter this market. While many franchisees have positioned themselves to offer drivers, very few have invested much effort into developing that aspect. This makes sense because there is a shortage of workers in general, and most of our offices still have more job openings than available candidates. Entering the trucking sector, which is an even tighter market, involves certain challenges. I believe that over time, this will become a good market for us. It is beneficial, but it isn't a major contributor to our growth. We are experiencing substantial growth; in fact, we're running about 47% ahead of the fourth quarter of 2020 based on comparable sales. There is a lot of business available without venturing into trucking. However, I do think adoption will increase as the worker market stabilizes.

No. That makes sense. I mean, it is obviously still very early on with that offering. It sounds like adoption has been pretty good by the franchisees and it is clearly a strong long-term play for you. So that makes total sense. Just as we are hopefully getting Omicron and COVID hopefully in the rearview mirror here, knock on wood. I mean, did you detect any noticeable impact in the fourth quarter or early 2022 on numbers from the surge in COVID cases? I mean, clearly you still exceeded pre-pandemic levels, but I was wondering if you think that impacted demand at all?

It's a good question and I'm not really sure of the answer. What I can say is that our demand from Thanksgiving until mid-January, during the peak of Omicron, was tremendous. We saw really strong demand throughout that period. You could interpret that in two ways. One interpretation is that it was just a recovery from the pandemic, viewing it as normal, or you could argue that companies were short on workers due to Omicron, and they were backfilling their warehouses and factories with temporary staff. However, I tend to think it's probably the first interpretation, mainly because our orders didn't come from new companies we hadn't worked with before; it was simply us fulfilling more of the existing demand. So it could be either explanation, but I believe it's the first one, indicating it was just a recovery from pre-pandemic levels. Nonetheless, the numbers were really strong.

Okay. And just lastly, can you touch on labor shortages. Have you seen any easing there? I know you said you started to see a bit of easing towards the end of the third quarter, but I mean that maybe Omicron that things tightened up a little bit or just how significantly are labor shortages impacting your ability to fill demand, I guess?

As I mentioned in our last earnings call in mid-November, the end of the $300 supplemental unemployment benefits really benefited us. Our fill rates began to improve in the second half of September. However, we are still experiencing a worker shortage. In some areas, the shortage is more severe than in others, but overall, it remains tight. The situation might be slightly better than it was in October or November, but we are still lacking workers, particularly those with specific skills. There has been a little improvement for general warehouse and construction workers, but for skilled positions like electricians or forklift drivers, the tightness remains similar to what we saw in October, though it is an improvement compared to July.

Okay. That's good color. And then nonetheless, you're still able to put up really strong growth in the quarter despite that. So congratulations on the results. Thanks. That's all I had for now.

Thank you.

The next question is coming from Aaron Edelheit from Mindset Capital. Your line is live.

Hi, Rick.

Hey, Aaron.

Hey, I wanted to look forward to this year and one model. You acquired companies last year and this year, and I wanted to discuss a model. Assuming there’s no unusual pandemic or if we continue the current trend, I estimate system-wide revenue to be around $440 million. Using the model you previously shared, which typically results in about 4% net, I arrive at EPS targets of approximately $1.30 in earnings. I'm just curious if I'm on the right track regarding system-wide revenue and if there’s anything that might alter the historical model or your perspective on HireQuest.

So let me break apart the two things that you suggested. As far as the system-wide sales, obviously, in 2019, if Command and HireQuest had been merged for the full year, our system-wide sales were, let's just say $290 million. The annual sales purchased in the LINK and Snelling transactions were like another $110 million. So that's $400 million, and we just bought $35 million worth of sales.

So that's 435 million.

Exactly, with zero growth. So I think that if you are using that number, I would sit there and say, well, yeah, that's just math. As far as income is concerned, realizing our target is 3.5 to 4.5. And frankly, with the amount of amortization that we have, 3.5 is a lot more realistic.

To amortization, I just want to confirm, that's because of your acquisitions. You're an asset-light business, so this is one request I wanted to make in the future maybe you could also report a cash EPS number that's fully taxed without the amortization because it's really not reflective of your underlying cash flow, right?

Well that's, I mean that part is true. And so we'll have to sort of look at your request there. Part of it, obviously we're trying to model that with our adjusted EBITDA as well to get something close to that. But I would also caution one of the things is needless to say, there will be costs related to converting these offices that we just bought into franchises. The cost of doing the deals and converting them to franchises. So I just throw that out there as well. I don't want you to think that, hey, Rick Hermanns is forecasting.

No for sure, but those are just the onetime costs, right?

Yes, absolutely. That's right.

But on a normalized basis, if I just took basically taking 2019, as you said, of what HireQuest's command center did, adding in the Snelling in-line and then your new acquisitions. And then using your historic framework, whether it's 3.5, which would be like a $1.14 to 4%, which would be a $1.30. And that assumes kind of no lab other acquisitions that, that's still a good framework to view HireQuest's.

Yes, I would agree with you.

I'm curious if you have been exploring new verticals. Clearly, you've been expanding and making acquisitions, including some significant ones like security guards. What does the outlook look like for tapping into another vertical this year?

I would simply say there's no delay with the three deals already closed, and I think my operations team and my finance team are getting bored. I believe it's time to move forward. They’re probably sitting there right now feeling restless, but I do believe that we will proceed without any obstacles. It really just depends on finding an attractive acquisition target; there is nothing limiting us at this point.

Got you. From the last two quarters, I've sensed, and I’ve always appreciated your honest communication. It feels like you've become much more optimistic about HireQuest compared to previous quarters. Am I overinterpreting this as a long-term shareholder? I'm just curious if you could share your thoughts on this.

I'm not completely certain, but I tend to be an optimistic person, so I can't entirely affirm your observation. What I can clearly state is that there is likely more confidence stemming from our recent performance in the fourth quarter, particularly as we exceeded pre-pandemic levels, including the command center. This showcases that over the last ten quarters, we've successfully retained the business we acquired, including Snelling and LINK. This indicates that we've done well in maintaining our acquisitions, which is crucial because in service company acquisitions, retaining staff is key to retaining business. When employees leave, business tends to decline. Often, in such acquisitions, top salespeople and good managers might leave due to cultural shifts. However, in our case, the existing management teams have generally remained intact. If I feel more confident, it's because our model has demonstrated its effectiveness over these ten quarters. I have always believed this would happen, although it's amusing to reflect on our history—after our acquisition and merger, we faced some costs for the first two quarters, and just as we seemed ready to move forward, the pandemic hit in the first quarter. It has certainly been a lengthy process, and while some uncertainties remain, like oil prices or inflation impacting our operations, I believe our business model has proven itself. Ultimately, this suggests that there are no real limits to what we can achieve.

That's great. And last question, thank you for that, is on inflation. In a weird way, you're somewhat insulated or might even benefit from inflation that flows through labor costs because your franchisees are getting a percentage of whatever the prevailing wage rate is. And then you're getting a percentage of the franchise. So in a weird way, as labor costs increase, HireQuest tags along. Is that the right way to think about it?

That's very accurate. I would say there are a few cases where we might be locked into a fixed price for the year, which could be around $18 an hour or $17, depending on the situation. This can create challenges in an inflationary environment. However, we currently have much more control over pricing than we have ever had before. In my 31 years in this business, I have never experienced this kind of pricing power. Right now, it's not just that we are demanding it; rather, the workers themselves have the pricing power. For example, if a client comes to us and requests a janitor at $14 an hour, I would say good luck, because they are unlikely to find someone at that rate. From that standpoint, we are well protected, which is a positive aspect.

Great, thanks again. Congrats on a great quarter.

Thank you.

This completes today's Q&A portion of the call. I'd like to turn the call back to management for closing remarks.

Well, again, thank you, everybody, for joining us on the call. I hope that you go away with a better understanding of how well the fourth quarter really did go for us, and that 2021 is really hopefully just a harbinger for the future. Thank you, again, for tuning in, and we look forward to a great 2022. Thanks a lot.

Thank you, ladies and gentlemen, this does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.